At January 1 2018 Cafe Med leased restaurant equipment from

At January 1, 2018, Cafe Med leased restaurant equipment from Crescent Corporation under a nice-year lease agreement. The lease agreement specifies annual payments of $34,000 beginning January 1, 2018, the beginning of the lease, and at each December 31 thereafter through 2025. The equipment was aquired recently by Crescent at a cost of $261,000 (its fair value) and was expected to have a useful life of 12 years with no salvage value at the end of its life. (Because the lease term is only 9 terms, the asset does have an expected residual value at the end of the lease term of $63,196). Crescent seeks a 8% return on its lease investments. By this arrangement, the lease is deemed to be an operating issue.

1) What will be the effect on the lease of Cafe Med\'s earnings for the first year (ignore taxes)?

2) What will be the balances in the balance sheet accounts related to the lease at the end of the first year for Cafe Med (ignore taxes)?

a) Lease payable balance (end of year)?

b) Right of use asset balance (end of year)?

Solution

1)-IN THE CURRENT SCENARIO SINCE THE LIFE OF EQUIPMENT IS 12 YEARS AND THE LEASE TERM IS 9 YEARS SO WE CAN RIGHTLY CONCLUDE THAT THE LEASE IS A FINANCIAL LEASE.AND IN CASE OF FINANCIAL LEASE THE LEASE RENTAL PAID BY CAFE MED WILL BE ALLOWED AS DEDUCTION ALONG WITH THE DEPRICIATION ON THE LEASED ASSET FROM THE GROSS INCOME OF CAFE MED.